Emerging Currencies Slip Amid Shifting Rate-cut Expectations

Emerging-market currencies dipped recently dwindling optimism over Federal Reserve rate cuts, paring their fourth-straight week of gains.

A gauge of developing currencies closed 0.1% lower as investors processed comments from Fed officials suggesting that rates should stay higher for longer. MSCI Inc.’s benchmark for equities advanced for a sixth day its longest winning streak since February.

“It will be difficult for EM FX to put together a sustained rally if the Fed pushes out cuts further and doesn’t make a decisive pivot toward cuts this year,” said Brendan McKenna, emerging-markets FX strategist at Wells Fargo & Co. “I think the Fed can still deliver at least one cut by the end of this year, but Fedspeak has shifted less dovish recently.”

Most Latin American currencies recently gained, led by the Chilean peso, meanwhile, Asian currencies edged lower, with the South Korean won lagging peers.

China announced its most forceful attempt yet to shore up the beleaguered property market, easing mortgage rules and encouraging local governments to buy unsold homes from developers for conversion into affordable housing. The Shanghai Stock Exchange Property Index surged following the statement.

Those factors added to the general risk-on mode this week following a report that showed inflation in the US was cooling, though global markets turned mixed recently.

“When we cut EM risk a few weeks ago, we had pointed out that higher US rates and a stronger dollar are a toxic mix for EM local,” Luis Costa, global head of EM sovereign debt strategy at Citigroup, said in an email. “Since then, the combination of FOMC speeches and the weaker growth data out of the US has led to US rates being more contained, as well as to a weaker dollar. This suggests that EM local can do better again.”

Emerging-market fundamentals are in “reasonably good shape” overall, Costa said.

In Latin America, Brazil’s Petrobras preferred shares recorded their worst weekly drop since November 2022, as the sudden ouster of the company’s CEO raised uncertainty around risks of political interference in the company ahead

A stronger Mexican peso is driving multinational companies to more aggressive hedging strategies. Commercial traders, who tap the currency futures and options market for protection, increased peso shorts in April to the highest level in more than four years.